India’s polity may be in a crisis, but the economy is chugging along quite nicely. The Union finance ministry’s mid-year analysis of the economy presents an upbeat view, forecasting a national income growth rate of more than 9 per cent this fiscal. The upward revision of Q1 GDP growth to 8.9 per cent implies that GDP growth rate for the half year is a healthy 8.9 per cent. This puts the economy well on course to meet the IMF projection of 8.8 per cent for fiscal 2011. Adding to the euphoria is the balance in the growth story for the year so far. Agricultural growth at over 4 per cent, admittedly aided by a base effect, has not merely helped in boosting overall growth and rural incomes, but is also expected to help mitigate runaway inflation. More to the point, bountiful rains, especially in the major food-growing regions, coupled with only a slightly lower net sowing area augur well for domestic food production during the rest of the year. Within industry, manufacturing was the best performing component, growing by 9.8 per cent, although well below the double-digit growth rates witnessed in the three preceding quarters. Services expectedly grew in double digits, surprisingly powered by robust growth in “trade, hotels and transport”, the component most vulnerable to external demand. If economic woes now prevailing in Europe and the United States persist, they could act as a dampener on services sector growth.
Expansionary fiscal and monetary policies, adopted in the aftermath of the economic crisis of 2008, have been responsible for both the limited adverse impact of the global slowdown on the economy and the sharp recovery thereafter. Enhanced government expenditure through fiscal expansion helped alleviate the impact of the decline in private consumption. Interestingly, a considerable part of the government’s fiscal stimulus was directed towards developing physical and human capital that would confer significant benefits over time. Similarly, RBI’s expansionary monetary policies helped instill consumer confidence at a time when credit had dried up and needs to be credited for the rapid turnaround. Inflation, while admittedly lower in October 2010, is still a cause for concern which explains RBI’s steps to adopt a tighter monetary policy through increases in both the repo and reverse repo rate during the fiscal. Supply-side constraints, caused mainly by shortages in both domestic and global availability of food, can be expected to be less severe in anticipation of a favourable rabi and kharif harvest, though an increase in oil prices that would follow a global economic recovery could neutralise some of these gains.
The mid-year review draws attention to concerns about the current account balance, owing to a widening of the trade deficit and high domestic debt. The surge in capital flows has compensated for lower export earnings and high trade deficit. The ministry has opposed controls on capital inflows, signalling a willingness to absorb more. While the Indian economy finds itself in a sweet spot due to a variety of factors, policy-makers cannot take things for granted. Uncertainties in the global environment apart, the paralysis of policy-making at home is going to hurt if the government does not recharge its batteries and focus on issues like investment in infrastructure, education and growth of manufacturing, which are all needed to sustain the 9 per cent growth story.
